After a near-death experience and a sale to a company that owns meat packing plants, Jefferies was written off as a contender for bulge bracket status. This assessment may be premature as Jefferies is aggressively expanding its equity business … through partnerships.
Two years ago Jefferies narrowly escaped collapse through exposure to European sovereign debt when MF Global went bankrupt. Hampered by concerns about the firm’s access to funding markets, Jefferies merged with Leucadia National Corp a year ago.
Leucadia, an eclectic holding company which includes National Beef Packing, Idaho Timber and the Hard Rock Hotel & Casino in Biloxi, Miss, made an initial investment in Jefferies during the financial crisis in 2008, expanded its holdings later that year, and during the scare caused by the collapse of MF Globalin 2011 purchased an additional one million shares of stock from Jefferies’ CEO. In November 2012, the merger was completed in a $2.48 billion all-stock deal.
The acquisition by Leucadia has given Jefferies access to a stronger balance sheet and internally generated cash flow. The merger has also helped Jefferies expand its equities business, but in an innovative fashion — through alliances rather than by hiring staff and opening new offices.
In April 2013 Jefferies announced that it entered into an alliance with Asia Plus Securities Public Company Limited to provide equity research on companies in Thailand which Jefferies distributes on a co-branded basis. Asia Plus also provides local equity broking services to Jefferies clients.
In May 2013 Jefferies announced that it entered into an alliance with PT Indo Premier Securities to provide equity co-branded research on companies in Indonesia. PT Indo Premier also provides local equity broking services to Jefferies clients.
In June 2013 Jefferies announced a deal with KAF-Seagroatt & Campbell Securities Snd Bhd for co-branded coverage of Malaysian stocks and local broking services.
In October 2013 Jefferies announced an alliance with Mirae Asset Securities to distribute co-branded Mirae Asset Securities’ equity research on companies in South Korea and local broking.
In November 2013, Jefferies announced a similar deal with Evans and Partners for co-branded Australian coverage.
The alliances are part of Jefferies’ equities expansion. As of April, Jefferies’ global equity research practice consisted of 125 analysts covering over 1,550 stocks. By November 2013 Jefferies was claiming 138 analysts covering over 1,600 stocks.
But even with its recent growth, Jefferies’ coverage pales in comparison with the top bulge bracket investment banks. In contrast, Bank of America Merrill Lynch says it employs over 600 analysts covering more than 3,400 companies globally.
Nevertheless, Jefferies’ alliance strategy gives it a couple of advantages relative to even the biggest investment banks. First, by partnering with local brokerages Jefferies will have access to deeper in-country coverage than rival banks, which tend to only cover the largest cap companies in many of the Asian markets.
Most importantly, the strategy is low-cost, protecting Jefferies’ margins in an environment of declining commission revenues. Jefferies has historically been one of the most consistently profitable investment banks, with sole exception of the crisis year of 2008.
The partnership strategy poses challenges for Jefferies. It will be difficult to maintain a consistent level of research product across 5+ external partners. It is also challenging to keep multiple partners consistently engaged and committed, especially as client interest in country-specific research waxes and wanes.
On the plus side, the partnerships allow Jefferies a relatively low-risk approach to test out relationships with local banks which, if productive, could lead to deeper collaboration on investment banking and even acquisition.
The alliances represent an innovative approach consistent with Jefferies’ reputation as a scrappy competitor and its focus on profitability. Above all, it signals that reports of Jefferies’ equity demise are premature.